The Multinationalization of Firms and the Transfer of Technology

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Chapter 2
The Multinationalization of Firms and the Transfer of Technology

Motoi Ihara



As businesses expand into the international arena, they transfer managerial resources. However, the extent of this transfer of managerial resources varies from country to country. It is relatively difficult to transfer a firm's personnel and the knowledge it embodies because of the different environments in which it has to operate when it expands. This factor plays an important part in the formulation of a corporate strategy. When a firm expands its business internationally, the external environment is likely to be quite different from that domestically. Accordingly, it needs to take into consideration the particular environment when it transfers its own knowledge or technology.

This chapter examines how firms that expand internationally take the environment into consideration when they formulate their corporate strategies. They focus on how to transfer their own knowledge, as embodied in their own personnel. This process is known as technology transfer.

The international expansion of Japan's manufacturing industry took off dramatically with the first oil crisis in 1973. From the 1980s until the early 1990s, the foreign direct investment (FDI) of Japanese manufacturing firms increased rapidly. This increase spurred research into the international expansion of Japanese enterprises in an attempt to explain the transferability of production systems and the characteristics of methods of technology transfer. While this research suggested themes for investigation, it was found that current issues required consideration from a more universal perspective. One of the factors that necessitated the change of perspective was that the international expansion of Japanese firms had not proceeded smoothly in the 1990s owing to Japan's economic slump and the Asian currency crisis.

Making this transition in perspectives required a process of rethinking the existing research on technology transfer. In past research, there had been a tendency to take technology as a given and to view it as a fixed factor in the international expansion of firms. This chapter, by contrast, takes the universal view outlined above and looks at how technology is influenced and transformed in the process of formulating and executing corporate strategy as conditions dictate.


The Transfer of Managerial Resources

Firms, especially manufacturing firms, that have expanded internationally may be roughly grouped into three types: those involving exports, licensing (in its broad sense), and direct investment. Among the various theories concerning these multinational enterprises, those which have focused on these three types and which have been chosen by firms expanding internationally, include the internalization theory of Rugman (1980) and Dunning's eclectic theory (Dunning, 1993).1 However, it is not possible to embark on an investigation of the actual state of the international expansion of firms with only information on typology, or choice of expansion type. Thus, internalization theory and eclectic theory need to be developed further.

What needs to be studied here is the literature on managerial resource transfers related to FDI.2 International expansion, whatever its type, is accompanied by the international transfer of managerial resources: goods, funds, personnel, and know ledge (information). Among the existing theories regarding multinational firms, it is the managerial resource transfer approach (Penrose, 1956; Komiya, 1972) concerning direct investment that has paid particular attention to this point. According to this approach, the international movement of managerial resources can vary according to the type of international expansion at hand. In the case of direct investment, it is clear that managerial resources are transferred on a larger scale than when exporting goods or licensing. For example, funds are only transferred when there is direct investment. Moreover, the transfer of personnel occurs most broadly in the case of direct investment. It is for these reasons that direct investment has drawn the most attention in the literature on the international expansion of firms. It is also for these reasons that the theory of the multinational firm has developed as an extension of direct investment theory.

1 Although Rugman's internalization theory was the central theory of the 1980s and Dunning's eclectic theory became the standard paradigm of multinational firms in that decade, theoretical work seems currently to be at a standstill.

2 Rosenberg and Frischtak (1985) concentrate on the issue of the movement of people in technology transfer.

The managerial resource transfer approach, especially as developed by Komiya, emphasizes the economic effects of the transfer of managerial resources. It says little, however, about the factors that drive the transfer of managerial resources.

Vernon's (1966) product-cycle theory is a representative example of an argument that attempts to make up for the limitations of the managerial resource transfer approach. This theory posits some sort of advantage arising in the investing firm's home country as the cause for managerial resource transfer. According to this theory, typically, a multinational firm's headquarters in an advanced country (say, the United States) is the source for technological innovation. As changes in a product's life cycle (that is, maturation and standardization of product and production processes) occur, the standardized technology is transferred to local subsidiaries located either in another advanced country or in a developing country. The product is then made locally.

As will be argued below, the product-cycle theory is not really an adequate framework. Some firms and industries may not adopt a product-cycle type of international production strategy, yet there is probably some sort of logic to the strategies that are adopted. Hill and Still (1984) develop an argument that counters the product-cycle theory. They hold that changes in product specifications to strengthen local competitiveness are more important as a product strategy for developing-country markets than is the standardization put forth by the product-cycle theory.

The argument here lies on a different plane. Each of the theories mentioned above tacitly assumes a generally high level of mobility for managerial resources. Certainly, goods, funds, and information are relatively easy to transfer, no matter what form they are in, and direct investment cannot happen without the movement of funds. However, a firm's personnel, and the diverse knowledge that they embody, are fundamentally limited in their ability to move. This is true even in cases of direct investment. Since managerial resources are not readily transferred, environments end up being relatively independent. If recent theories of the multinational firm have been inclined to focus on the selection of the mode of international expansion (internalization theory and eclectic theory) or on home-country advantage (product-cycle theory), then this chapter is an attempt to integrate existing theories while paying attention to the environment.

The Business Environment

Let us assume the relative independence of environments that arises from the low degree of transferability of two managerial resources: personnel and the knowledge they embody. When a firm expands its business across national borders, how it responds to the various environments becomes an important issue.3 One of the oft-cited limitations of

3 Internalization theory tries to exclude the effects of site conditions on the decision-making process for direct investment. Dunning's eclectic theory attempts to integrate internalization with site conditions. Although problems of theoretical coherence remain, eclectic theory retains its effectiveness as the primary approach to the analysis of historical as well as contemporary conditions.

existing theories of the multinational firm is its weakness in specific, local-level analysis of particular environments. In analyzing a firm's international activities, the environment should not be reduced simply to an element that complicates the firm's organization chart. What constitutes the environment includes markets, industrial relations, the educational system, and government policies in that location. Porter (1990) names inter-firm competition, related industries, markets, and the role of government in a particular country or region as constituent elements of the environment.

To a certain extent, the environment dictates a firm's strategy and organization when it expands its business internationally. This applies especially to the consumer goods sector, which is more governed by trends in consumption than is the capital goods sector. Porter (1986) focuses on the characteristics of international expansion and suggests that industries may be divided into the global type and the multi-domestic type. Multi-domestic industries are those in which the activities that are closest to the buyer (sales, marketing, and some research and development) are the keys to competitive strength and for which international competition is governed by the unique conditions of each national market. Within the chemical sector, the oils and fats industry may be said to belong to this multi-domestic category.4 For the major part of the oils and fats industry, it is important to have a close connection with consumers in the domestic market, and as such, it is possible to characterize the industry as a “consumer” chemicals industry. International business activity in the oils and fats industry certainly began with the acquisition, in Africa, of raw-material oils and fats for soap production by the Anglo-Dutch multinational Unilever (Fieldhouse, 1978). Because product shipping costs are high and demand varies by region in this industry, the firms actively engaged in direct investment for the purpose of acquiring local product markets after Unilever's initial foray. Unilever's entry into the United States during the first half of the twentieth century, and Procter & Gamble's entry into Europe after World War II, are prominent examples of this dynamic.

Investigation of multi-domestic industries has not been sufficient in the study of multinational firms, and even Porter himself ultimately excludes the subject from consideration. The strength with which a country's attributes affect business management is, however, readily apparent in this type of industry, and a number of multinational firms have arisen in this area. Multinationals that originated in Japan are still undeveloped in the realm of multi-domestic industries. According to Stopford's (1992) rankings of multinational firms by value of international sales, American and European firms are at the top in the oils and fats chemical industry, while the only Japanese firm that has achieved a place in the rankings is Kao.5 In this context, there ought to be more case studies of multinational firms in multi-domestic industries.

4 See Ihara See Ihara (2000). (2000).

5 According to Stopford's rankings of multinational firms by sales, Western firms such as Unilever (30th), Procter & Gamble (54th), Johnson and Johnson (99th), Henkel (105th), and Colgate-Palmolive (145th) rank high in the oils-and-fats chemical industry. As for Japanese firms, Kao at ranking 428 barely makes the list.

Finally, the business environment is multilayered. Environments enjoy some independence, whether they exist in large regions such as North America, Europe, or Asia, or in the individual countries that make up a region, or in the various local units within a single country. This independence is caused by the relative decline of the nation-state and the rise of regional integration and local devolution, which have in turn affected the movement of people. The increasing interest in research on regional headquarters is also related to this trend toward regional integration, which finds its principal expression in Europe.

Corporate Strategy and Organizational Structure

When a firm pursues international expansion in the form of direct investment, the consequent transfer of managerial resources is relatively large-scale. Direct investment itself, however, means the international expansion of management rights, and the transfer of managerial resources occurs as a corollary to that process. Given expanded management rights, the firm formulates a strategy and builds an organization, but at the same time it must pay close attention to the environment. The firm thus faces, on the one hand, the issue of how to make its strategy and organization conform to the specific environment of the market it is entering. On the other hand, the firm faces the issue of how to impart unity to a strategy and organization that has developed internationally. If the former issue is called “localization” and the latter is termed “globalization,” then the firm must achieve these two goals at the same time. The question is whether the two can really be achieved simultaneously.

In expanding internationally, a firm must aim for a certain level of international standardization while also differentiating its strategy and organization to fit the environment. These two orientations, differentiation and standardization, are related to the application and adaptation approach developed by Abo et al. (1994). This approach highlights two orientations for a firm: application, whereby the firm brings in its own production system that provides a competitive advantage; and adaptation, whereby the firm adapts that production system to local conditions. Adaptation connotes differentiation, while application corresponds to standardization. This approach is mainly used with respect to the transfer of production systems. It is also possible, however, to raise similar kinds of issues with respect to marketing.

Firms that are expanding internationally are also confronted with two strategic and organizational alternatives, namely, centralization and decentralization. Focusing on the international vertical division of labor within multinational firms, Hymer (1979) and Kindleberger (1969) emphasize the centralization orientation. They posit a hierarchical model of the multinational in which there are three strata of functions: decision making for everyday operational activities, supervision and monitoring of the decision-making process, and global decision making and planning. These three functional strata then stratify the firm into a structure comprising the local subsidiary, the regional headquarters, and the head office. Hymer's and Kindleberger's approach to the problem is based

on a recognition that the internal organizational layers of a multinational firm reflect the actual layers in decision-making and consumption patterns that occur in the world economy.

Hedlund (1986), on the other hand, turns his attention to decentralization. He sets his focus on decision making among organizations and on the location of control, and proposes an organizational model for the multinational firm that has a flexible relationship between parent company and subsidiary. In contrast to the hierarchy model that takes as its prototype the American multinational, Hedlund creates a “heterarchy” model from European multinationals operating in the European Union (EU), which are network-type multinationals in which the policymaking authority is dispersed.

The differences between the Hymer–Kindleberger approach and that of Hedlund show how problematic it is to build a single model for the strategy and organization of the multinational firm. Hymer and Kindleberger explain the multinational firm with a homogeneous model, while Hedlund proposes a different homogeneous unity model. Bartlett and Ghoshal (1989), in contrast, suggest a heterogeneous model, elaborate on a typology for multinational firms, and propose three types of firms: the American-style international firm, the European-style multinational firm, and the Japanese-style global firm. They add a fourth type, the transnational firm, to overcome the flaws in the three-way typology. According to Bartlett and Ghoshal, the global (Japanese-style) firm is characterized by a centralized organization, which is less able at adapting to local conditions than European-style firms, and poorer at transferring knowledge than American firms. Conversely, the Japanese-style global firm enjoys competitive advantages in terms of global efficiency. All three models—American, European, and Japanese—are equidistant from the ideal transnational type of business organization in terms of the trade-off between a flexible response to local conditions and global efficiency. Yasumuro (1992) proceeds in Bartlett's and Ghoshal's vein and proposes a regional control strategy and a regional headquarters system as more practical devices for the transnational firm.

Bartlett and Ghoshal compare American, European, and Japanese multinational firms in three different industries. One of the questions they encounter in this process is why firms with excellent technological capacity, efficient plants, and proven marketing ability become stalled in foreign markets. In answer to this, Bartlett and Ghoshal conclude that the fundamental problem is not the products themselves or the inappropriateness of marketing strategies, but the lack of ability to understand and adapt appropriately to the differences among markets. From several case studies they generalize that, as global firms, Japanese multinationals concentrate knowledge and the authority to formulate policy in the parent company and thus enjoy advantages in the pursuit of global efficiency, but at the same time they suffer from weaknesses in terms of the ability to respond nimbly to changes in the local environment and sharing local technological innovations throughout the firm.

In observing the two processes of localization and globalization, the aforementioned issues of differentiation versus standardization, decentralization versus centralization, and homogeneous versus heterogeneous models need to be kept in mind.

Taking the considerations discussed above as a given with respect to the international expansion of firms, it is possible to shed new light on the international transfer of technology.


Technology and Technology Transfer

Technology has been defined as both the machinery or equipment and the human control organization that operates it. It has also been defined as a system of information.6 These definitions, however, are biased toward production technology, even in the case of the manufacturing industry. As used here, production technology may be understood as both the physical elements of the production process, or plant and equipment, and the knowledge, including the organization of management and accumulated skills, for operating those physical elements. If not only process innovation but also product innovation is included, the products themselves, which have been created by machines and management organizations, should also be included in the term “technology.”7

The term “technology transfer” has come to embrace a variety of objects and is thus used as a broad concept. The transfer of technology may be defined as the acquisition of technology in a context different from that in which it was born. Here, the term “context” can be considered to be equivalent to “environment.” Based on the concept defined above, technology will change in response to its context or environment through its transfer, not only when it is embodied in machinery and equipment or a production control system, but also when it is embodied in the product itself. Usually technology transfer is carried out via a continuous process. One reason for this is that technology includes know-how not necessarily written down in black and white.8

6 Various arguments have been developed concerning the definition of technology, including what is known in Japan as the “technology debate.” For definitions of technology and technology transfer, see Kobayashi (1981, pp. 2–13). Abo takes up the definition of industrial technology by noting that “the content, character, and level of industrial technology are determined by the creation and direction of a mechanical system, the creation and direction of a management organization for doing so, and the combination of the two” (Abo, 1995, p. 18). This concept basically overlaps with this chapter's definition of “production technology.”

7 Technology transfer starts with the passing on of operating and maintenance technology which gradually grows more intensive (Hayashi, 1986). In this area, innovation and the transfer of production technology have a certain degree of importance with respect to a firm's activities. Hollander seeks causes for the improvement in productivity at Du Pont's rayon plant during and after the 1920s by analyzing productivity for all factors. He argues for the importance of minor technical changes, based on factory level improvements in production technology, as opposed to major technical changes centered on innovation in the research laboratory (Hollander, 1965). Hollander's argument is linked to Rosenberg's typology of technological innovation.

8 Teece (1997) claims that the transfer of technology unembodied in either machinery and equipment or documentary information generates transaction costs for the firm. He specifically measures engineering costs in technology transfer projects in the petrochemical and machinery sectors.

The forms of international technology transfer may be broadly divided into exports, technology licensing, and direct investment.9 Technology transfer via exports includes such routes as the export of plant and reverse engineering. The dispatch of specialists may accompany the export of a plant, and is also key to technology licensing and direct investment. The media for such transfers include documents, specialists, technicians, operators, and the plant itself.10 Technology may be written down in the form of documentary information or may be embodied in machinery and equipment, products, or human beings.

The influence of technology transfer upon the recipient may be divided into direct effects and indirect effects. Direct effects are those brought about through the sale of products and the transfer of marketing techniques and management methods related to it; through worker training and other types of production control techniques; through local procurement of raw materials and parts; and through the execution of research and development as well as design at the local subsidiary (Quinn, 1969). Indirect effects include the development of new markets as a result of the entry of new firms as well as competition and emulative pressure from local firms.

Intra-firm Technology Transfer and Corporate Strategy

For firms expanding internationally, technology transfer forms a crucial part of corporate strategy. If it is assumed, as outlined above, that not only machinery and equipment and management organization but also the products created thereby are included in the technology transfer process, then the technology to be transferred must include both the production technology and the broader technology associated with the product. The former consists of production management and equipment design capacities. The latter includes worker training, product sales formats and the management thereof, marketing techniques, and the capacity to procure raw materials and parts locally.

When production technology is transferred, it is necessary to transfer the machinery and equipment as well as the skills and the management organization that allow such equipment to be operated efficiently. Production technology becomes firmly fixed through a continuous transfer process, but technology and skills continue to improve even after a plant has been set up. This process, however, requires a firm's ongoing commitment and a corporate strategy premised on that commitment.

9 Technology transfer via direct investment is known as intra-firm technology transfer and is distinguished from technology transfer through other media. Komoda (1987) separates technology transfer into intra-firm technology transfer (technology transfer via direct investment) and inter-firm technology transfer (technology transfer by a mode other than direct investment, such as licensing), and favors the former as “technology transfer driven by market competition.” Komoda points out that, in cases of meaningful intra-firm technology transfer, the kernel of the new technology, which is to be kept confidential under the terms of the licensing agreement, or the knowhow related to production technology, or business management which is not necessarily recorded in the licensing agreement, is transferred.

10 Uchida (1990) proposes a scheme which focuses especially on the decision-making process when technology is to be introduced. For examples of empirical research on the chemicals sector that use Uchida's scheme, see Yamazaki (1975) and Kudo (1992).

In the process of adapting to the local environment, especially the unique features of the local market, a firm may need to change its marketing strategy (in the broad sense of product strategy, pricing policy, distribution channels, and sales promotion) to fit local conditions. Instead of adopting the same distribution and advertising policy it uses in its home market, a firm may have to make changes to fit conditions in another country. These changes are usually based on the differences between the environments and may include not just economic factors such as the competitive environment or industrial interconnections, but also government policy and consumer culture. Responding to the unique features of the local market is also important for product development, the point of contact between production technology and marketing. Firms need to change product specifications to match the unique conditions in a country or a region.

The difficulties which accompany technology transfer include not only those arising from the transfer of production technology but also those involving the transfer of knowhow. The know-how includes adapting a product's specifications to local demand, as well as distribution channels, advertising campaigns, and pricing policy.

Technology transfer must therefore be taken as a crucial link in corporate strategy. This perspective, however, has often not been adopted in existing research. The few exceptions to this pattern include the quantitative observation by Horaguchi (1992) of withdrawal from overseas markets, and a case study by Ota (1997, 1998) concerning the internationalization of marketing at Ajinomoto. Abo (1994) has also conducted studies on the relations between parent and subsidiary companies. He does not, however, actively assert any claims about these parent–subsidiary relations and “production system adaptation/application.”

Intra-firm Technology Transfer in Equipment Industries

State-of-the-art research on technology transfer in Japanese manufacturing firms is represented by Shiba's (1973) comparative study of the effect of technology movements on labor in power plants in various countries, and Takamiya's (1981) and White and Trevor's (1983) studies of management organization in Japanese firms in Britain. Takamiya, White and Trevor point out that various organizational practices that lie in the areas of production management and labor management lead to high labor productivity and product quality in Japanese firms.

Koike and Inoki (1987) consider as a technology transfer the passing on of skills through personnel training that enables workers to respond to changes and malfunctions by giving them opportunities for participation on the shop floor. They find that even though the plants of both Japanese and local Southeast Asian firms have adopted on-the-job training (O-J-T) as the primary mode of human resource formation in workplaces that are at the forefront of skills transfer, the Japanese plants are superior in terms of the breadth and depth of O-J-T.

Abo (1994) considers the transfer of production technology from the perspective of production system transfer. Production systems are classified as Japanese or non-Japanese

in style and an attempt is made to measure the degree to which Japanese systems have been implemented overseas by means of the adaptation/application approach. His analysis of the Japanese production system elaborates on the concept of “shopfloorism” that Itagaki detailed with regard to the role of shop foremen. A number of similar studies on the transfer of Japanese management and production systems have been made. Those by Ichimura and Yoshihara (1985), which focuses on surveys of local employees in the local language, and by Shiraki (1995), which employs questionnaires addressed to American and European firms along with Japanese firms, deserve mention for their methodological features.

In recent years a number of authors have produced powerful research, including the volume by Matsuzaki (1996) on the electronics and steel industries in China, the comparative work by Williams et al. (1994) on Japanese and British automobile plants, and the study by Nakamura and Wicaksono (1999) of the transfer of production management technology by Toyota and Toshiba in Indonesia.

These examples of leading research in the field are almost all about the shop floor in assembly industries, such as automobiles, electrical equipment, and electronics. They thus take as their chief indices of technology transfer improvement in the yield, or pace of the assembly line. They deal with the problem of technology transfer in the relatively narrow area of the shop floor, in terms of the improvements in the capacity of workers and the incorporation of production management techniques on the assembly line.

In contrast, in the international expansion of firms and the transfer of technology in the equipment industries (including the chemicals sector), not only is the transfer of production management skills important, as in the assembly industries, but the transfer of operating and maintenance skills as well as the process of decision making is also crucial. There is very little high-quality, up-to-date research on these equipment industries. However, Takabayashi (1989) does take up the issue of plant export in the cement sector, and he argues that the causes of declining machinery employment ratios after plants have been set up in most developing countries are related not just to the skills of the workers but to the social capacity for industrialization, including such factors as local parts and the energy supply system. Takabayashi's research excels in terms of narrowing the focus of analysis and using a large number of internal company materials.


Centralization and Decentralization

On the one hand, multinational firms tend to pursue economies of scale in the global market, but on the other hand, they need to adapt to national (regional) differences in each country. This appears to be an anomaly, but in fact creates the uniqueness of a multinational organization. Earlier research on multinational organizations has tended to overemphasize the economies of scale issue.

The historical process of multinationalization follows three stages: “internationalization,” “localization,” “and globalization.” In the third stage, “globalization,” factors from the previous two stages are influential. In the first stage, “internationalization,” firms transfer their managerial resources that have had a competitive advantage in their home country, but in the “localization” stage, as a result of adaptation, localized products, human resources, and capital through the accumulation of global-scale corporate strategies, firms take on the original meaning of “globalization” in which nationality does not matter. Technology transfers, the opening up of new markets, and competition with local firms are mainly based on the efforts of the local subsidiaries. Because they need to integrate the organization and strategy of the local subsidiaries, which tend to disperse resources in the process of pursuing localization, headquarters should regulate the business policies of the subsidiaries, and even decide their existence.

To complete this study, a framework that analyzes the strategies and structures of both headquarters and subsidiaries is proposed here. This framework (see Figure 2.1) aims to shed light on some areas that past studies have overlooked.

First, the focus will be on the process of expanding internationally by a domestic firm, especially the motivation to enter overseas markets. The theory of multinational enterprises states that there are three reasons for becoming multinational: firm-specific advantages, location advantages, and internalization (Dunning, 1993). It is insufficient to explain the motivation behind multinationalization by considering only one factor, such as “internalization theory.” It is important to use a plurality of factors, because of historical roots. Thus, an evolutional approach is preferred to explain the process of multinationalization, by describing origins, developments, continuity, and in some cases even the withdrawal of enterprises.

Secondly, the relationship between headquarters and the subsidiary and other overseas businesses is examined to see how they are formed and managed, particularly

how strategies are formed and how responding to these strategies shapes the organizations. Regionwide strategies, such as regional headquarters, the international division of labor, and regional (Asian) brands are also taken into account.

Response to Markets: Standardization and Adaptation

Whatever the motivation is for multinationalization, over a long period of time, these firms should gain some competitive advantage over non-multinational firms. To best sketch the process of the transfer of competitive advantage in detail, a description of corporate activities, function by function, is needed.

Marketing is one of the central pillars of corporate activities. Multinational enterprises have two ways to carry out international marketing: the first is to standardize the products and marketing activity to pursue worldwide efficiency; and the second is to modify them to the tastes of local consumers and the preferences of the local distribution system—that is, either transferring entirely its competitive advantage directly from its home country to the host country, or adjusting it to the specific needs of the local market.

There is, however, a counterargument to the above statement that standardization is the best solution for large modern companies. They can manipulate the preferences of consumers to make it fit standardization. Standardization certainly has great advantages for achieving worldwide efficiency, and oligopolistic firms can change the tastes of consumers by taking advantage of their position in the market.

However, there are some questions regarding the idea that standardization is supreme. Firstly, consumers' tastes converge only very slowly. Diffusion of information technology is likely to promote standardization, but information technology can also enlighten and highlight a potential diversity of needs and create new niche markets. Secondly, there are not many Japanese companies that hold a sufficiently dominant position in world markets to change the tastes of global consumers. Thirdly, because the scope of “marketing” varies widely, it is better to divide it into parts. The well-known marketing mix, or the 4P (product, promotion, place, purchasing) approach, is useful. Again, there are boundaries between marketing and technology or production, such as product development and distribution, which are important in the pursuit of standardization. On the other hand, marketing activity which is carried out in close proximity to a market requires a greater adaptation to local conditions.

This approach focuses on the power balance between firms and consumer demand, and is more appropriate than believing that firms always create demand. This point of view is represented here by the standardization-adaptation approach, in which the degree of standardization-adaptation is examined in four ways. First, there is the product policy, such as building up the product line, product pricing policy, and product development policies within the local subsidiary. For example, to develop a detergent, a combination of the technologies of the required materials is essential. It is possible to trace, through a historical case study, how a Japanese company that has some kind of advantage transfers it for some purpose. It is also important to see how they grasped particular aspects of the local market, rather than only transferring made-in-Japan products, and how they

modified products and combinations of materials. Secondly, there is the process of building a distribution network in the local market. A distribution system that firms try to transfer is usually adapted to the customs of the local distribution system. The power balance between multinationals and joint-venture partners, wholesalers and retailers, is also relevant. Thirdly, there is the issue of advertisement and promotion policies, investments for local advertisements, and how the allocation of investment was made to each product. Finally, there is the training of sales staff to play a role in the local market.

Transfer of Production Technology

To research manufacturing firms, it is necessary to analyze the process of the transfer of production technology, because production is closely related to marketing and other management functions.

Transferring production technology is not merely the movement of machinery and equipment, information or knowledge, but also the capability to improve them, or production management skills. Thus, technology is transferred through an embodiment of technical documentation, plant, and engineers/technicians. Technology is different from science, and is difficult to articulate clearly in all its aspects as it is also influenced by the social background. It involves a long-term and accumulative process.

The level of production technology transferred by headquarters is, to a certain degree, determined by the long-term corporate strategy. There are two main points regarding long-term corporate strategy. The first is the global operation strategy, such as the multinational's location of production sites and distribution networks. The second is the basic policy toward production management. For example, many firms do not want to depend on the skills of the local operators or be subject to frequent stops in production, and thus, they build a production system in which the equipment is thoroughly automated.

Furthermore, the level of transfer of technology is determined not only by the strategy of the sender, but also by the technology capability of the recipient. Generally, the production steps in the chemical industry consists of research, development, basic design, scale-up design, trial run, construction, and production. The process of putting into production upstream research and development is not a one-sided transfer of information from the R&D department to the production department. At the point of production, many problems not anticipated at the R&D stage, such as post-production maintenance, often arise. In a technology transfer, it is important that the recipients of the technology, such as maintenance staff and machine operators, have the capability to revise and adapt information received from upstream activities during the actual production process.

The Logic of Multinationalization: An Integrative Viewpoint

Strategies and structures of firms can be understood from three viewpoints: whole company strategy; operational decision making, such as marketing, production, and personnel; and organization headquarters–subsidiary relations. The standard viewpoint

of a modern large corporation is that “structure follows strategy,” as stated by Chandler (1962). This means that top managers determine the corporate strategy by recognizing their environment and their strategy for organizational control and daily operations. However, the relationship between strategy and structure is not one-sided, such that “strategy decides the structure of organizations.” Rather, the characteristics of an organization are affected by the initial historical conditions in the home country, and these will not change very rapidly. Multinational corporations cannot easily escape the influences of the organization in the home country. From observations on Japanese firms, it seems that many Japanese companies start to internationalize because they are driven by necessity rather than having a clear strategy; later they modify their policies in the light of local conditions. Thus, in order to understand the long-term changes in the power balance between organization, strategy, and environment, the framework for research needs to utilize historical case studies to be more dynamic.


This chapter has examined how firms that are about to expand internationally take the environment into consideration when they formulate their strategy. These firms focus greatly on how to transfer and adapt their own knowledge, as embodied in their own personnel, into the new environment. This process is known as technology transfer. It is important when considering the multinationalization of firms, not only to clarify the motivation behind the direct investment, but also to anticipate problems in management that may arise after direct investment has taken place, such as the relationship between headquarters and the subsidiary, marketing, production and personnel management. Ultimately, however, to understand the process of multinationalization in its entirety, it is important to identify the motivation behind internationalization.


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The Multinationalization of Firms and the Transfer of Technology

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